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Friday 12 April 2013

Words of Caution

Serious resistance has been broken this week and yesterday I was giving the next obvious targets over 1600, and the obvious target for this cyclical bull market much higher than that. I do have some short term words of caution to add however and they are that:

  • I am very doubtful about the current widely held assumption that QE means that we can have no multi-week and deep retracements
  • The current dependence of the market on QE cuts both ways. It is broadly supportive as long as it lasts, but gains that are due mainly to QE may well be lost quickly as and when this round of QE ends. 
  • Equities are in the strong topping period between the last week of March and the first week of May. If you stretch this period to the three months from the beginning of March to the end of May, the last year where a significant high or low was not made in this period leading to a reversal move of at least 8% was 1999, though there are then several more instances in the years before that.
  • SPX has risen a long way and has not yet driven high enough on the current move to kill off the negative RSI divergence on the daily chart. 
Subject to those caveats the next obvious upside target is the weekly upper BB over 1611 and the bollinger band pinch on the daily chart supports that target. 

On the daily chart SPX traded entirely above the upper bollinger band yesterday and this can last anything from a day to several days historically. While this lasts the low of the day is generally within a couple of points of the upper bollinger band which rose seven points to close at 1585 yesterday:
Are we still in a topping process in my view? Yes, but I need to define how I see that. The rising channel on SPX from November broke down last week and that has put us in a topping process where I am looking at topping options. The short term topping options last week failed but I am still looking at 1539 as a candidate H&S neckline with the head being formed at the moment. that head may go considerably higher before topping out and I'll be watching for a second break below channel support (now in the 1560 area) as a signal that the interim top may well then have been made. What I am not expecting to see is a hit of broken rising channel resistance, now in the 1615 area and rising. I have drawn in a shallower channel that may now be forming on the 60min chart:
So what can we expect today? ES has retraced somewhat overnight and is testing support at the 50 hour moving average. That may hold. If it doesn't hold it's worth noting that the steep rising channel I posted yesterday morning has broken down on strongly negative RSI divergence, and that a small sloping H&S has also broken down with a target in the 1574 ES area. That would be in the right area to retest broken resistance at the 2007 high:
Related markets are leaning bearish for equities this morning. CL failed badly to make a higher high yesterday and is now close to making a lower low. Subject to seeing that lower low CL is still in a downtrend and the last bounce was just a rally within that. I have made a few notes on the chart about why I have been ignoring the obvious large H&S type pattern on the chart just to underline that I have seen this, but am ignoring it for good technical reasons:
EURUSD has reversed at the possible IHS neckline at 1.313 that I have been mentioning. Do I think that an IHS is forming? Possibly, but probably not. There are three main reasons for leaning bearish on EURUSD here. The first is that there is really no fundamental reason to be bullish on EURUSD here. The Cyprus debacle is likely to be putting downward pressure on EURUSD for the rest of the year and the EU has also hinted clearly that it would like to see the Euro go lower. Secondly EURUSD tends to form decent channels or wedges during strong trends and there wasn't one on the last move down. That has me looking for a wedge or channel to form in a continuing downtrend and the current rally high has just established a declining channel.Thirdly JPYUSD has broken down and is unlikely to reverse back up, GBPUSD is in the right area to reverse back down as well, and a EURUSD downtrend fits well into an overall picture where USD seems likely to continue upwards. I might be mistaken but I think there's more downside coming for the Euro soon:
TLT is still testing strong support at the 2011 highs and I'm still leaning bullish on TLT overall, though it needs to recover back over the 200 DMA in the next few days. If we see TLT back below 118 the current bull scenario will be fading fast however:
For today I am leaning bearish as long as ES can break below the 50 hour moving average. The obvious low would be in the 1570-4 range if it can. If it can't then it's worth noting that the daily upper bollinger band on SPX should close in the 1589-92 range today:

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